Skip to content

FRM Part II · FRM Exam Part II · Credit Derivatives

An analyst compares a cash CDO with a synthetic CDO referencing the same corporate names. Which feature is characteristic of the synthetic structure?

A synthetic CDO obtains its credit exposure by selling protection through credit default swaps instead of buying the underlying bonds, so it does not need to fund and own the reference assets. Tranching by attachment points and loss seniority still applies.

  1. AThe issuer must fund the full notional by purchasing the reference bonds
  2. BCredit exposure is obtained through credit default swaps, so the issuer need not own the underlying bondsCorrect
  3. CTranches cannot be sliced by attachment and detachment points
  4. DLosses are allocated pro rata across all tranches

Explanation

A synthetic CDO gains credit exposure by selling protection through CDS rather than buying bonds, so funding the full notional is not required. It still has tranches defined by attachment and detachment points, and losses still follow seniority, not pro rata allocation.

Did you get it right without looking?

One question tells you little. A timed set on Credit Derivatives shows your real accuracy, how long you take and where you lose marks.

Practise Credit DerivativesFree diagnostic mock

More Credit Derivatives questions